Business resiliente

02/10/2020

Initial positions adopted in case law on commercial, business and business unit leases in Covid-19 times

By Arturo Meglio, Pierluigi Vingolo and Luca Nardello, Studio Legale Associato K&L Gates

The restrictions imposed by Covid-19 have generated turnover and liquidity difficulties for businesses. How has this affected leases and productive activities?

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Turnover and liquidity difficulties

While the public health emergency triggered by Covid-19 has not yet been resolved, initial conclusions about the positions adopted in case law can (and should) be drawn.
Due to the restrictive measures introduced by the Italian government to curb the spread of the Coronavirus, many businesses have found themselves in a position where they are unable to generate turnover and have significant liquidity issues. This has made it extremely hard for their owners to pay the leases on their premises or on the business or business unit they have leased.

While the business owners have found themselves in a position where they cannot generate turnover and have liquidity issues, on the other hand, lessors can avail of several methods to demand (even immediately)payment

Lessors usually include clauses in the lease contracts to safeguard themselves against the lessee’s default, such as the immediate enforcement of guarantees. These methods can range from the more common first level guarantees (bank or insurance sureties) to more straightforward tools such as bills of exchange and cheques.
During this pandemic, some lessors have threatened to enforce the guarantees provided by their lessees, ignoring the unforeseeable and blameless difficulties the latter are incurring due to the emergency.

Good faith and fairness obligation

To date, and mainly on a precautionary basis, Italian court rulings have tried to resolve an unclear regulation by acting as a decompression valve aimed at nipping in the bud any conduct contrary to the principles of fairness and good faith which, at least in theory, should guide the parties in the performance of any contractual relationship. It is generally accepted that the good faith and fairness obligation is an autonomous legal duty and an expression of a general social solidarity principle which requires both parties, within certain limits, to act correctly in order to protect both their interests.

The good faith and fairness obligation should be adhered to by the parties to any contract and is an autonomous legal duty

According to one case law approach, the emergency situation and the related restrictive measures introduced by the government are a supervening impossibility which justifies the lessee’s temporary inability to fulfil their contractual commitments (1). As a result, some courts have temporarily prevented certain lessors from enforcing guarantees provided by the lessees to guarantee their timely lease payments on a precautionary basis (2).

The cases of the Rome Court

Two recent rulings of the Rome Court, both published as a result of precautionary judgements as per article 700 of the Code of Civil Procedure provide different sides of the positions taken by the courts. As explained later, the two hearings explored and processed, in different ways, the initial case law approach given for the post-Covid-19 phase, giving rise to different solutions.

Smaller payments only for the lockdown

With its first de jure ruling of 25 July 2020, the Rome Court noted that:

- there is no “general regulation that provides for the suspension of the obligation to make lease payments”;

- it may be impossible for the lessor to fully provide its service (as it is impossible to allow the lessee to carry out its business although the premises are available for use) on a temporary basis (as non-use was only for a limited time period);

- as this “impossibility is partial and temporary, its impact on the obligation to make lease payments is to reduce the payments as per article 1464 of the Italian Civil Code, although this reduction is discontinued when the service (of the lessor) can be again provided in full”.

The Rome Court thus rejected the precautionary petition presented by the lessee (which, inter alia, requested suspension of the obligation to make lease payments) and ordered that the payments be reduced during solely the period of partial impossibility (i.e., during the lockdown) by 70%, given that the lessee could not carry out its business during that period.

Payment review and suspension of guarantees

The Rome Court’s de jure ruling of 27 August 2020 was different although the basis was the same as it focused on the application of the principles of fairness and good faith.
The rational and innovative ruling considered that:

- the economic crisis caused by the pandemic and the shuttering of business activities qualifies as a “supervening event in fact and law which triggers the requirement to renegotiate the contract; this is because, in the case of a commercial lease, the contract is drawn up assuming that a property will be used to carry out production activities”;

- despite the non-inclusion of renegotiation clauses in the contract, long-term contracts shall “continue to be complied with and applied by the parties as long as the conditions and assumptions valid when the contract was signed remain so”;

- when there is “a supervening event in fact and law that triggers the requirement to renegotiate the contract, such as the situation caused by the Covid-19 pandemic, the party disadvantaged by continuation of the contact at the originally agreed terms shall be allowed to renegotiate it in accordance with the general duty of objective good faith (or fairness) during performance of the contract (article 1375 of the Italian Civil Code)”;

- should the lessor refuse to renegotiate the contract in these new circumstances, “resort shall be made to equitable good faith to restore the contract to fair conditions”.

The Rome Court accepted the precautionary petition presented by the lessee, unable to make the lease payments due to the pandemic and related restrictive measures which obliged them to close their business, returning the contract to an equitable situation, amending it and ordering that:

- the lease payment be reduced by 40% for April and May 2020;

- the lease payment be reduced by 20% for the months from June 2020 to March 2021, giving due consideration to the decrease in the number of customer accesses allowed by law;

- the suspension of the surety provided as guarantee of payment unless the lessee’s outstanding lease liability exceeds €30,000.00.

This ruling will become a reference point and will be referred to frequently in defence briefs of the lawyers defending lessees of commercial or production properties.

Overview of the situation

In short:

- according to the Rome Court’s first ruling, the negative effects of the government measures only affect the obligation to make the lease payments during the lockdown period; while

- the Court’s second ruling found that, if the contract is not renegotiated on a voluntary basis and in accordance with the principles of fairness and good faith, the lessee has the right to have the contract adjusted by the court in order to obtain a reduction in the lease payments for the periods after the lockdown as well as the lessor’s greater flexibility with respect to enforcement of the lessee’s guarantees.

It remains to be seen what further case law developments will take place to understand what position the courts will take while it should be noted that the legal principles referred to herein could also be applied to other contractual relationships other than those of lessors and lessees.

All rights reserved.

([1])         The first de jure ruling of the Naples Court dated 17 April 2020 is of interest as, for the first time, it affirms in general terms that the strict restrictions imposed as a result of the Covid-19 emergency generated “a supervening impossibility” for the debtor, including in the case of contracts agreed between individuals, if they can prove that, regardless of their conduct, the introduction of these restrictive measures has made it impossible for them to carry out their business, with the resulting “exemption from debtor’s liability” for their contractual default.

 

([2])         In this respect, reference is made to the following measures issued on a precautionary basis that are all based on the same reasonings:
i.           precautionary ruling handed down inaudita altera parte by the Venice Court on 14 April 2020 in De Jure;
ii.          precautionary ruling handed down inaudita altera parte by the Bologna Court on 12 May 2020 in De Jure;
iii.         precautionary ruling handed down inaudita altera parte by the Rimini Court on 25 May 2020 in ilcaso.it;

iv.            precautionary ruling handed down inaudita altera parte by the Genoa Court on 1 June 2020 in ilcaso.it.